The U.S. airline industry has started recovering from the effects of the COVID-19 pandemic this year. However, JetBlue Airways (NASDAQ:JBLU) has lagged many of its rivals, largely due to its focus on the Northeast region, where air travel demand has returned at a slower pace.
JetBlue underperformed most peers again last quarter, and that trend looks set to continue through the end of 2021. Nevertheless, the low-fare airline is making meaningful progress toward rebuilding its profit margin with every passing quarter.
Another big step forward
In the second quarter, JetBlue's revenue decreased 29% compared to Q2 2019 on 15% less capacity. (On a year-over-year basis, revenue surged sevenfold from $215 million to $1.5 billion.) Revenue modestly exceeded the high end of the company's initial guidance for the quarter, thanks to strengthening demand and a 1.5 percentage point tailwind from the recent renewal of JetBlue's co-branded credit card agreement.
This revenue momentum helped JetBlue improve its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to negative $86 million. The company did post a $57 million ($0.20 per share) profit under generally accepted accounting principles (GAAP) for the quarter. However, excluding the benefit from government payroll support grants, it recorded a $309 million adjusted pre-tax loss.
Many domestic-focused airlines returned to positive EBITDA last quarter and posted smaller net losses. Thus, JetBlue hasn't caught up to its closest peers yet. That said, JetBlue beat its initial guidance, which called for quarterly adjusted EBITDA between negative $100 million and negative $200 million. Moreover, its Q2 performance was a huge improvement over the first quarter, when adjusted EBITDA totaled negative $458 million.
More of the same in the third quarter
This quarter, JetBlue plans to reduce capacity a mere 0% to 3% compared to the third quarter of 2019, as it restores capacity to meet strong demand for summer leisure travel. It anticipates a big sequential top-line improvement, with revenue declining just 4% to 9% compared to the same period two years ago.
As a result, JetBlue expects to be profitable in July and August (but probably not September). It estimates that third-quarter adjusted EBITDA will reach $75 million to $175 million, which implies a modest loss for the full quarter.
With most of its rivals expecting to post positive adjusted earnings this quarter, JetBlue remains behind the curve in its recovery -- but this time cost pressure is the main problem. Adjusted nonfuel unit costs are on track to rise 11% to 13% compared to Q3 2019 this quarter, even though the airline has now restored capacity to around pre-pandemic levels.
Management estimates half of the unit cost pressure stems from labor inefficiencies related to the rapid capacity ramp up and short-term increases in airport costs. The airline also faces a significant headwind from deferred maintenance costs after slashing maintenance activity to the bone last year to conserve cash. Investments related to its new alliance with American Airlines and normal cost inflation will drive another 3 percentage points of unit cost growth.
Will JetBlue get back on track in 2022?
JetBlue's growing revenue momentum bodes well for 2022. After all, the company expects to log a single-digit revenue decline this quarter (relative to 2019) after its first-quarter revenue plunged 61% compared to the period two years earlier.
That said, JetBlue's unit cost pressures won't completely disappear next year. Three months ago, the airline projected that 2022 adjusted nonfuel unit costs would decrease compared to 2019. Now, it is calling for a low-single-digit increase on that basis.
Most of the incremental pressure JetBlue is experiencing relates to moves that should also boost unit revenue. These include keeping its fleet of 100-seat Embraer E190s in service longer than previously planned and growing in high-cost, capacity-constrained airports. The key question is how soon the revenue benefit of these initiatives will outweigh the incremental costs.
After rallying past $20 earlier this year, JetBlue stock has fallen back to around $15. At that price, the shares continue to look attractive based on JetBlue's near-term opportunities to boost revenue to new heights, along with its longer-term potential to drive unit costs below pre-pandemic levels.